Shutterfly Swarms Over Kodak Gallery

What better time to make an acquisition than when the acquired party is owned by a firm on its last legs? Shutterfly (NAS: SFLY) is set to be the new owner of Kodak Gallery, the online presence of the bankrupt Eastman Kodak (OTC: EKDKQ). Unless some weird event occurs, Shutterfly will end up as the owner of the site and get it for cheap -- so far it's the only bidder, and the offer deadline is past.

Customers for penniesOnce upon a time, Kodak Gallery (formerly Ofoto) was at the core of its parent company's attempts to turn around its fortunes by going digital. That didn't work and Eastman Kodak's business continued to decline, to the point where it declared bankruptcy earlier this year. Kodak is currently trying to shed assets in order to pare down to its latest (rather dubious) core turnaround strategy of selling commercial printers and ink.

So the Kodak Gallery deal is essentially a fire sale. Shutterfly is wise to take advantage of this -- it's offered $23.8 million for the site, which has around 2 million active and 75 million registered users. That means it's paying only around $11 for each of those regulars. Looked at through a different viewfinder, Shutterfly will shell out a buck for every $6.30 in revenue its new acquisition could potentially bring in, based on the unit's peak sales figures under Kodak. How's that for a bargain?

Picture books on demandIt's not that Shutterfly wants to host yet another photo site to complement its own established offering. Rather, it aims to build a wider customer base so it can sell its personalized products and services. These include customized photo books which, as any glance at the firm's website will reveal, are promoted aggressively.

And successfully. The company's strong top-line growth in recent quarters and years has been almost exclusively due to such personalized goods. These raked in $375 million in fiscal 2011, for strong 71% year-on-year growth. This is crucial for Shutterfly since that segment comprises an increasingly large share of overall revenue -- 79% and 71%, respectively, for 2011 and 2010. The company's print-from-Web-photos service is essentially a come-on, an offering usually provided at a discount in order to steer the customer toward the higher value-added stuff.

Kodak Gallery will be an easy site to integrate into Shutterfly, as it essentially offers the same products and services. This is the ideal situation for an acquiring company to find itself in -- quickly and simply gaining market share for almost nothing.

Shutterflying above rivalsThat increased presence will help get the company to the point where it's the first destination for anyone wanting to print a photo or make their own picture book. Competition is still pretty strong, especially from big retailers Wal-Mart (NYS: WMT) and Costco (NAS: COST) , which are not shy about promoting their photo offerings. The edge Shutterfly has over those guys is that it concentrates exclusively on photo services and is not a sprawling entity selling hundreds of product lines. Perhaps as a result, its offerings typically get better reviews from customers.

Whether it manages to leverage this successfully in the future, it's to be commended for taking advantage of the opportunity Kodak Gallery presents. Look for the company to keep its camera eye open for other deals in the future and pounce on the good ones.